Thank you to those who participated in this year’s AllAboutAlpha/Terrapinn 130/30 poll. Despite being distracted by market events of the past month, response rates were largely the same as last year across most categories and geographies. We just finished re-counting the “pregnant” and “hanging” chads last week and can now provide you with the results.
Before we dive into the highlights below, the usual caveats should be issued. Like last year’s survey, the respondents to this year’s edition are 100% self-selected. As a result, they may likely be biased toward 130/30 investing already. On the other hand, this was also the case last year. So comparisons between the two polls may still be somewhat instructive.
To fully understand the results, it’s helpful to quickly tell you about the broad demographics of the 100+ respondents. Asset managers comprised a larger proportion of this year’s respondents due to a drop in the number of end investors filling out the survey.
This drop could be a result of the recent market calamities (filling out online surveys may not be at the top of most investors’ priority lists right now), or it could mean that investors are just not into 130/30. However, analysis of the (smaller) sample of investors suggests that interest remains significant.
Response was also higher from North America and Europe than it was last year. This may have simply been a result of the particularly mailing list used to alert people about the survey.
The products offered by managers and purchased by investors (e.g. hedge vs. long-only) also remained pretty consistent over the two surveys – mitigating our concern that this year’s sample was more or less biased towards hedge funds than last year’s.
“New Paradigm” or “Marketing Fad”?
Despite the demographic changes in the sample for this year’s survey, attitudes toward 130/30 funds remained pretty stable. The majority of respondents still felt 130/30 was “a new investment paradigm with long-term potential.”
Frankly, we weren’t surprised at this result given the weighting toward asset managers in the sample (many of whom offer 130/30 products themselves). So we excluded the managers from the results and re-created the chart using the results from investors, consultants, and service providers (who might be a little less biased). But the result was actually pretty consistent. This year, a slight majority of respondents thought 130/30 was a “new investment paradigm”.
So how did these attitudes translate into actual adoption of 130/30 funds? An astounding 59% of managers who responded to the question about implementation said they were “currently implementing” 130/30. We were surprised by this figure given that less than half said they planned to do so last year. This may be an example of a pro-130/30 bias in the sample (although such a bias did not seem to exist last year). Alternatively, this might also reflect the fact that implementing a 130/30 program can be done relatively quickly and with little incremental investment – making it a no-brainer for asset managers to start a small 130/30 fund or simply remove the “long-only constraint” from an existing fund.
Okay, so if the managers might have a pro-130/30 bias, what about the investors? While the sample was a little smaller, the investors’ experience seems to corroborate the managers’ story. Nearly half of investors have either adopted 130/30 or plan to do so in the next 12 months.
Again, we can’t truly gauge the self-selection bias in our sample. But the year-over-year comparison may be instructive.
Issues and Challenges
As Prof. Andrew Lo has written, 130/30 may be the “new long-only”. But investor concerns remain. Specifically, both investors and managers tell us that the manager’s short-selling experience remains a key question. Oddly, the short track record of most 130/30 funds is a larger concern for respondents this year that it was last year. It could be that the lacklustre performance of these funds over the past year has raised flags – suggesting that more performance figures are needed before investors feel comfortable with these funds.
Implementation challenges also remain. Managers and investors told us that the biggest issue remains securing board approval for short selling (the VW-gate’s short squeeze probably not helping the cause, that’s for sure).
Quantitative vs. Fundamental
One of the hottest topics of debate over the past year has been whether a quant or fundamental approach is better suited to 130/30 investing.
Overall, there seems to have been a major shift from the “quantitative” and “haven’t decided yet” camps to the “fundamental” camp. But once again, how much of this is a result of the significant proportion of asset managers in our sample? What if we simply had a lot of fundamental managers?
To find out, we excluded the managers and re-ran this chart. The results suggested that investors and consultants seemed to view fundamental 130/30 strategies more favorably – albeit by a significantly lower margin. For them, the jury remains out.
Issues with Short-Selling
Given recent bans on short-selling and rising borrow costs, the 800 pound gorilla in the room is obviously the ability of 130/30 funds to actually short stocks. So we asked respondents if they are considering alternatives to traditional single-stock shorting. Most managers, investors and consultants had recently considered, used or advised on alternatives to traditional short-selling.
The most popular alternatives are familiar tools to portable alpha investors: ETFs, followed by futures, “other derivatives” (e.g. CFDs) and options.
So what does this all mean? Well, it could simply mean that the 130/30 industry flocked to our survey to goose the numbers. Or, more likely, it could mean that the underlying rationale for 130/30 funds endures even though recent market events push it off the front pages and board agendas for the time being. If so, don’t write off short extension strategies just yet.